When The Bank Espirito Santo catches a cold, watch the world sneeze. If this evolving situation doesn't highlight the tight interconnectedness of the paper financial system, nothing else will.

This a direct hit and a potential trigger that could set of a daisy chain of events, ultimately calling into question the only market left large enough to back (unofficially) fiat or debt based currencies.

When the world of electronic finance catches the flu, the true nature is all systems fail.

Suddenly massive leverage would be suspended in a vacuum, (destroyed, incinerated, disintegrated) in a matter of seconds. And the pursuit of the real safe haven will begin.

It is just a matter of time.

Of course, no one knows for absolute certain.

This could be "the time" when the shorts get caught and panic-cover.

There are many reasons why this could trigger.

One type of event that could do it happened this month.

One of Portugal's largest banks, Espirito Santo, sent waves through the financial system when we learned they would default on a payment.

And they have been fighting against bankruptcy ever since.

From the Financial Times:

"The five strands of the family own their stake in BES, through Espírito Santo Financial Group, the company at the bottom of a complex network of holdings. Moody’s has slashed ESFG’s credit rating by three notches to “extremely speculative” and its shares have not been traded for more than a week. The risk to the Espírito Santos’s stake in BES is that ESFG could be forced to convert its bonds into equity if it cannot pay investors."

The FT also noted that Portugal's bond market has suffered further losses, as concerns over the country's biggest bank and its shareholders mount.

It noted that the benchmark 10-year yield climbed another 13 bps to 3.89%, the highest level since mid-May.

It said the concerns center on Banco Espirito Santo and its largest shareholder, Espirito Santo Financial Group, after the latter ran into financial difficulty. It highlighted comments from Deutsche Bank's Jim Reid, who warned that it has bought questions over the underlying health of peripheral banks and the still evolving mechanism for dealing with struggling institutions back into the spotlight.

And fast forward to this week:

President Anibal Cavaco Silva is the first high-profile politician to warn of a possible economic impact from the Espirito Santo crisis, after the family asked for creditor protection for one of its key holding companies on Friday.

Last week another of the family's companies failed to repay on time over $1 billion in debt owed to Portugal Telecom, which had a knock-on effect on the latter's merger with Brazil's Grupo Oi, forcing it to take a cut in its stake in the new entity.

"If some citizens, some investors suffer significant losses (from the Espirito Santo group) they may delay investment decisions, or some of them may find themselves in very big difficulties," Cavaco Silva said in comments during a visit to South Korea, which were aired on local television.

"We cannot ignore that there will be some impact on the real economy."

Portugal, which in May emerged from an EU/IMF bailout it had to take during the euro zone debt crisis, is expecting its economy to grow by 1 percent this year, the first year of growth since 2011.

The problem is contagion, exposure and mispriced risk.

Clearly default swaps and derivative contracts would be triggered on a default. The problem is no one has ready access to the entire chain of counterparties. Not only do the counter parties not expect to make payments, but no one knows if they have exposure -or for how much.

In a liquidity crisis, everything stops suddenly in one great instantaneous loss of confidence.

By the time it is all sorted out, it will be too late.

The system and the economies underlying them break beyond repair. No reflation. Though of course they will try in desperation.

THIS is what could potentially trigger a bigger run on the bond market and THIS is exactly the dynamic of which regulators in the U.S. are terrified.

This is why you see the sudden surge in big bank CEO's running around asking for derivative reforms.

It's the big one. The one that terrifies the authorities.

Whether it is interest rates or precious metals, the charade can go on for only a little while.

The appearance of control fuels confidence for only so long. When the cycle breaks, and the wheels stop, it ends.

In the aftermath, loss of confidence and a wall of money.

A worldwide failure - a freeze - would do more damage to the already ailing patient.

Too many claims, not enough reality underlying.

And nowhere is this dichotomy more extreme than in commodities. And, in particular, the ones with monetary quality.

This is why price manipulation goes on.

It is another way of managing behavior. Keeping the masses quiet while lining and protecting the pockets of the too big to fail.

As for the precious metals:

As soon as intervention comes screaming in to save the day (whether by tax payer socializations or outright money printing), the metals will disappear along with every other real asset that isn't tied down.

Retail markets can go no bid in a matter of hours, despite the computers still functioning at the CME.

The more things change, the more they stay the same.

The financial system is bloated and a generation away from any real connection to an organic economy. The financial sector is essentially a whole misallocated paper backed by confidence. Paper claims to a dwindling tangible reality. Prices are manipulated across the board as a way of masking the underlying rot. Some assets are inflated, others are suppressed.

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